Federal Taxation-Individuals (15-25%) Flashcards
What is the tax-benefit rule for casualty losses?
if taxpayer deducted casualty loss (federally declared disaster area) in a prior period, and ends up receiving the money in a later year, reimbursement needs to be included in income because the expense provided a tax benefit
What types of interest income are exempt from federal income taxes?
- interest on state obligations
- interest on municipal bonds
- interest on state bonds
- interest on county bonds
- interest on EE savings bonds (if were issued after taxpayers 24th birthday, is sole owner, incurred higher education expenses in year of redemption)
When does rental income and expenses not need to be included in gross income?
if rented out less than 15 days per year
How do estimated accrued income items get reported?
estimated/accrued in year known, if larger amount actually received in a following year, difference is taxable in the year received
When can employee benefits-discounts be excluded from income?
- value is up to 20% of services
- no more than the average gross profit percentage for goods
When can employee benefits-insurance premiums be excluded from income?
- group term life insurance (up to $50,000 coverage)
- health insurance premiums
- disability insurance premiums
When can employee benefits-fringe benefits be excluded from income?
- meals/lodging for convenience of employer
- working condition expenses (provided by employer that would be deductible if employee had paid the expense)
- de minimus fringes
- employee discounts
- employee gifts under $25
- safety/achievement awards
What are some exclusions from gross income?
- gifts received (except from employer to employee)
- scholarships (if not required to work as part of)
- child support/alimony
- workers compensation money received
- life insurance proceeds
- dividends received from life insurance policy (up to amount of premiums paid)
What are some separately stated transaction items that will flow-through to K1 for shareholders/partners?
- charitable contributions
- section 179 write-off
- gains and losses on sale of equipment
- rental activities
- tax credits
What is relationship between deducting losses in an S Corporation/Partnership and their existing basis?
shareholder/partner can only deduct losses up to extent of their basis in corporation/partnership
ex: basis = $10,000 (100% owner). business loss = $40,000. can only deduct $10,000 loss.
What are deductions FOR AGI?
lower your gross income to arrive at AGI (page 1 deductions - above the line items)
- business/trade expenses
- rent/royalty expenses
- 50% self employment tax
- 100% self employment medical insurance premiums
- retirement plan contributions
- HSA contributions
- student loan interest
What are deductions FROM AGI?
itemized deductions (Sch A deductions)
- medical expenses (7.5% in excess of AGI)
- qualified residence interest (home mortgage) ($750,000 indebtedness limit)
- state income taxes
- property taxes (max taxes = $10,000)
- charitable contributions (60% of AGI)
- casualty losses (formula for deduction amount)
- employee business travel
- business gifts ($25 per customer)
What is considered a passive activity?
rental real estate or a business in which the taxpayer does not materially participate (business ventures)
test for materially participating = putting over 500 hours in the year, or at least 100 hours but is more time than anyone else in the business
How are passive activity losses accounted for (not for rental real estate)?
passive activity losses are limited to income generated from the activity
passive losses from one activity, can offset income from a different passive activity
excess passive activity losses can be carried forward and used in future years when there is passive income or until property is disposed of in a taxable transaction
How are passive activity losses accounted for, for rental real estate?
deductible amount is limited to $25,000 in one year (person must own more than 10% of rental activity & actively participate)
if AGI is above $100,000, then the $25,000 is reduced by 50% of AGI above $100,000 (if at $150,000 gross income, there would be no deduction)
What is the exception to passive activity losses for rental real estate, if for a real estate professional?
passive activity limitations do not apply, IF:
- more than 50% of personal service’s during the year were performed in real property business/trades in which they materially participate, AND,
- spends more than 750 hours performing real property business/trades in which they materially participate
When can you deduct losses and bad debts?
when completely or partially useless
includes:
- non-business debt (must be actual loan)
- business debt (direct write off method required)
- assets (sold for no consideration)
What are the rules for capital losses?
up to $3,000 can be deducted against ordinary income, rest is carried forward indefinitely
What are the rules for NOLs?
no carryback, carry forward indefinitely (for business/trades)
when NOL is applied, can only be applied up to 80% of income, rest is carried forward
What are the rules for excess business losses?
losses from business activity cannot exceed $262,000 single/$524,000 married. disallowed in year occurred, added to NOL to carryforward.
What are the rules of at-risk loss limitations?
can claim loss only up to when the loss equals your “at risk” amount - considered at risk for the amount of cash they’ve contributed to an activity, the adjusted basis of property they’ve contributed, or any debt they are personally liable for as a part of this activity.
ex: have passive investment of $20,000 and it loses $5,000 per year, you can only claim that loss for 4 years (4 x $5,000 = $20,000)
What are the rules for gambling losses?
can only be deducted up to amount of gambling winnings
ex: lost $5,000, won $2,000, allowed to deduct $2,000 of losses.
* expenses related to gambling (traveling to/from casinos) can also be included in losses
What are some rules that prevent taxpayers from benefitting by filing married filing separately?
neither spouse can:
- claim earned income credit
- claim education credit
- claim child credit
- claim other dependents credit
What are the rules for surviving spouse filing status?
surviving spouse can use joint rates for 2 years after spouse has passed. surviving spouse must provide >50% of costs of maintaining household for their child.
year of death = married filing joint year after = surviving spouse 2 years after = surviving spouse 3 years after = single *unless re-marries
